Strong retail sales likely to limit immediate downside risks to sterling

Late September the sterling dropped sharply in a flash crash to 1.184 area, after French President Hollande spoke tough on negotiations. It has recovered since but continues to struggle. A better than expected job numbers yesterday provided support to the pound and a better than expected retail sales should limit immediate downside to the sterling.

September retail sales report would be vital for the next move in the sterling. If the sales remain strong it would be an indication that the regular people have largely ignored the outcome of the referendum, in terms of spending habit.

However, pound’s decline may not be good for the retail sales.

• The pound has acted as a shock absorbent for the UK economy by boosting the profits of the exporters, however, a lower pound could be detrimental for the consumers as it means higher import cost and increased retail prices. The inflation report released this week already signaled such.

• Stronger retail sales, however, would mean that the Bank of England has room for longer pause before acing again. So that could provide some support to the pound.

So the performance of the pound now stands on, how economy performs, regardless of what inflation reading is and how much strength dollar can pose. In the medium term, it would depend on the commentaries from Article 50 negotiations.

• Retail sales report for September is expected at 8:30 GMT. August saw 6.2 percent growth y/y and today it is expected much softer around 4.8 percent.

The pound is currently trading at 1.228 against the dollar. Key resistance lies at 1.24. We expect some bounce back in the near term,  but we stand by our parity call